ECB QE Hopes Brings Life Back To Stocks, BoJ On Deck

Talking points:

– Global equities caught a strong bid last night, with the Nikkei moving up by a whopping 5.88% as ECB QE-hopes propelled risk assets off of lows. Expectations are building for the Bank of Japan to increase their QE-package. But will they, or can they? We find out next week.

– Many global equity markets are putting in long-legged Doji formations for the week, and that will often happen ahead of a swing. This doesn’t negate the bearish trends, but it does give reason for caution if pressing the short trade. Stocks have already put in a huge move lower on the month.

– The ultimate question is whether the Fed will back down, as that appears to be the push point that really started the recent bout of chaos. This might not be as simple as it looks, as the Fed has to consider broad-market impacts of continued low-rate policy (impact to investors/pension funds).

We may have just gotten a preview of what’s in store for this year: In yesterday’s piece, we discussed how Mario Draghi’s hints towards an increase in QE from the ECB may be around-the-corner at the March meeting. This had brought strength to stocks and reversals to many of the major risk-off trends that have dominated markets thus far in 2016, with the big question being: How long will this last? At the time we published yesterday, it looked as though sellers had already begun jumping back in to fade the move in stocks, and there was strong action on both sides of the spread in SPX throughout the US session yesterday, producing a Doji on the Daily chart.

But as Asia opened strength in risk-on really took off and this has continued through the European session as the S&P currently finds itself nearing that very familiar 1,900 level, with a very interesting level of resistance just 5 handles above.

The big question here, and related to the question we asked yesterday pertaining to the lifespan of this rally, is how much of this is short covering and how much is legitimate dip-buying? Buying stocks after a ~10% haircut is risky to say the least, so we’ll likely see this theme play out over the coming weeks.

The preview that we got today was something that we’re probably going to be seeing more of throughout the year, and this is something that we’ve been talking about in these market talks for some time now: And that is the expectation for action or verbiage from Central Banks in the effort of offsetting this current batch of economic pain. And the ECB is a big deal, the Bank of Japan is a big deal (which we discuss below), but the big one that could really change matters is the Fed, as their hawkishness appears to be what’s driven this whole theme of weakness after the December rate hike carried with it the expectation for four full rate hikes going into 2016.